Risk-Based Capital Guidelines; Capital Adequacy Guidelines; Capital Maintenance: Regulatory Capital; Impact of Modifications to Generally Accepted Accounting Principles; Consolidation of Asset-Backed Commercial Paper Programs; and Other Related Issues, 47138-47148 [E9-21497]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION
• FEDERAL RESERVE SYSTEM
• Office of the Comptroller of the Currency
• DEPARTMENT OF THE TREASURY
• Office of Thrift Supervision
• Comptroller of the Currency

[Federal Register Volume 74, Number 177 (Tuesday, September 15, 2009)]
[Proposed Rules]
[Pages 47138-47148]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-21497]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket ID: OCC-2009-0012]
RIN 1557-AD26

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-1368]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AD48

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[No. OTS-2009-0015]
RIN 1550-AC36


Risk-Based Capital Guidelines; Capital Adequacy Guidelines; 
Capital Maintenance: Regulatory Capital; Impact of Modifications to 
Generally Accepted Accounting Principles; Consolidation of Asset-Backed 
Commercial Paper Programs; and Other Related Issues

AGENCY: Office of the Comptroller of the Currency, Department of the 
Treasury; Board of Governors of the Federal Reserve System; Federal 
Deposit Insurance Corporation; and Office of Thrift Supervision, 
Department of the Treasury.

ACTION: Notice of proposed rulemaking with request for public comment.

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SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of 
Governors of the Federal Reserve System (Board), Federal Deposit 
Insurance Corporation (FDIC), and the Office of Thrift Supervision 
(OTS) (collectively, the agencies) are requesting comment on a proposal 
to modify their general risk-based and advanced risk-based capital 
adequacy frameworks to eliminate the exclusion of certain consolidated 
asset-backed commercial paper programs from risk-weighted assets and 
provide a reservation of authority in their general risk-based and 
advanced risk-based capital adequacy frameworks to permit the agencies 
to require banking organizations to treat entities that are

[[Page 47139]]

not consolidated under accounting standards as if they were 
consolidated for risk-based capital purposes, commensurate with the 
risk relationship of the banking organization to the structure. The 
agencies are issuing this proposal and request for comment to better 
align capital requirements with the actual risk of certain exposures 
and to obtain information and views from the public on the effect on 
regulatory capital that will result from the implementation of the 
Financial Accounting Standard Board's (FASB) Statement of Financial 
Accounting Standards No. 166, Accounting for Transfers of Financial 
Assets, an Amendment of FASB Statement No. 140 and Statement of 
Financial Accounting Standards No. 167, Amendments to FASB 
Interpretation No. 46(R).

DATES: Comments on this notice of proposed rulemaking must be received 
by October 15, 2009.

ADDRESSES: Comments should be directed to:
    OCC: Because paper mail in the Washington, DC area and at the 
agencies is subject to delay, commenters are encouraged to submit 
comments by the Federal eRulemaking Portal or e-mail, if possible. 
Please use the title ``Risk-Based Capital Guidelines; Capital Adequacy 
Guidelines; Capital Maintenance: Regulatory Capital; Impact of 
Modifications to Generally Accepted Accounting Principles; 
Consolidation of Asset-Backed Commercial Paper Programs; and Other 
Related Issues'' to facilitate the organization and distribution of the 
comments. You may submit comments by any of the following methods:
     Federal eRulemaking Portal--``Regulations.gov'': Go to 
https://www.regulations.gov. Under the ``More Search Options'' tab click 
next to the ``Advanced Docket Search'' option where indicated, select 
``Comptroller of the Currency'' from the agency drop-down menu, then 
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2009-0012'' 
to submit or view public comments and to view supporting and related 
materials for this proposed rule. The ``How to Use This Site'' link on 
the Regulations.gov home page provides information on using 
Regulations.gov, including instructions for submitting or viewing 
public comments, viewing other supporting and related materials, and 
viewing the docket after the close of the comment period.
     E-mail: regs.comments@occ.treas.gov.
     Mail: Office of the Comptroller of the Currency, 250 E 
Street, SW., Mail Stop 2-3, Washington, DC 20219.
     Fax: (202) 874-5274.
     Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2-3, 
Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket Number OCC-2009-0012'' in your comment. In general, the OCC 
will enter all comments received into the docket and publish them on 
the Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, e-mail addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this proposed rule by any of the following methods:
     Viewing Comments Electronically: Go to https://www.regulations.gov, under the ``More Search Options'' tab click next 
to the ``Advanced Document Search'' option where indicated, select 
``Comptroller of the Currency'' from the agency drop-down menu, then 
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2009-0012'' 
to view public comments for this rulemaking action.
     Viewing Comments Personally: You may inspect and photocopy 
comments at the OCC, 250 E. Street, SW., Washington, DC. For security 
reasons, the OCC requires that visitors make an appointment to inspect 
comments. You may do so by calling (202) 874-4700. Upon arrival, 
visitors must present valid government-issued photo identification and 
submit to security screening in order to inspect and photocopy 
comments.
     Docket: You may view or request available background 
documents and project summaries using the methods described above.
    Board: You may submit comments, identified by Docket No. R-1368, by 
any of the following methods:
     Agency Web Site: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include docket 
number in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room MP-500 of the Board's Martin Building (20th and C 
Street, NW.) between 9 a.m. and 5 p.m. on weekdays.
    FDIC: You may submit comments by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Agency Web site: https://www.FDIC.gov/regulations/laws/federal/propose.html.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street, NW., Washington, DC 20429.
     Hand Delivered/Courier: The guard station at the rear of 
the 550 17th Street Building (located on F Street), on business days 
between 7 a.m. and 5 p.m.
     E-mail: comments@FDIC.gov.
    Instructions: Comments submitted must include ``FDIC'' and ``RIN 
3064-AD48.'' Comments received will be posted without change to https://www.FDIC.gov/regulations/laws/federal/propose.html, including any 
personal information provided.
    OTS: You may submit comments, identified by OTS-2009-0015, by any 
of the following methods:
     Federal eRulemaking Portal: ``Regulations.gov'': Go to 
https://www.regulations.gov. Under the ``more Search Options'' tab click 
next to the ``Advanced Docket Search'' option where indicated, select 
``Office of Thrift Supervision'' from the agency dropdown menu, then 
click ``Submit.'' In the ``Docket ID'' column, select ``OTS-2009-0015'' 
to submit or view public comments and to view supporting and related 
materials for this proposed rulemaking. The ``How to Use This Site'' 
link on the Regulations.gov home page provides information on using 
Regulations.gov, including instructions for submitting or viewing 
public comments, viewing other supporting and related materials, and 
viewing the docket after the close of the comment period.

[[Page 47140]]

     Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: OTS-2009-0015.
     Facsimile: (202) 906-6518.
     Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: OTS-2009-0015.
     Instructions: All submissions received must include the 
agency name and docket number for this rulemaking. All comments 
received will be posted without change, including any personal 
information provided. Comments, including attachments and other 
supporting materials received are part of the public record and subject 
to public disclosure. Do not enclose any information in your comment or 
supporting materials that you consider confidential or inappropriate 
for public disclosure.
     Viewing Comments Electronically: Go to https://www.regulations.gov, under the ``More Search Options'' tab click next 
to the ``Advanced Document Search'' option where indicated, select 
``Office of Thrift Supervision'' from the agency drop-down menu, then 
click ``Submit.'' In the ``Docket ID'' column, select ``OTS-2009-0015'' 
to view public comments for this notice of proposed rulemaking action.
     Viewing Comments On-Site: You may inspect comments at the 
Public Reading Room, 1700 G Street, NW., by appointment. To make an 
appointment for access, call (202) 906-5922, send an e-mail to 
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202) 
906-6518. (Prior notice identifying the materials you will be 
requesting will assist us in serving you.) We schedule appointments on 
business days between 10 a.m. and 4 p.m. In most cases, appointments 
will be available the next business day following the date we receive a 
request.

FOR FURTHER INFORMATION CONTACT: OCC: Paul Podgorski, Risk Expert, 
Capital Policy Division, (202) 874-4755, or Carl Kaminski, Senior 
Attorney, 202 874-5405, or Ron Shimabukuro, Senior Counsel, Legislative 
and Regulatory Activities Division, (202) 874-5090, Office of the 
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.
    Board: Barbara J. Bouchard, Associate Director, (202) 452-3072, or 
Anna Lee Hewko, (202) 530-6260, Manager, Supervisory Policy and 
Guidance, Division of Banking Supervision and Regulation; or April C. 
Snyder, Counsel, (202) 452-3099, or Benjamin W. McDonough, Senior 
Attorney, (202) 452-2036, Legal Division. For the hearing impaired 
only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.
    FDIC: Jim Weinberger, Senior Policy Analyst, (202) 898-7034, 
Christine Bouvier, Senior Policy Analyst (Bank Accounting), (202) 898-
7289, Division of Supervision and Consumer Protection; or Mark 
Handzlik, Senior Attorney, (202) 898-3990, or Michael Phillips, 
Counsel, (202) 898-3581, Supervision Branch, Legal Division.
    OTS: Teresa A. Scott, Senior Policy Analyst, (202) 906-6478, 
Capital Risk, Christine Smith, Senior Policy Analyst, (202) 906-5740, 
Capital Risk, or Marvin Shaw, Senior Attorney, (202) 906-6639, 
Legislation and Regulation Division, Office of Thrift Supervision, 1700 
G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    The agencies' regulatory capital regime for banking organizations 
\1\ incorporates both leverage and risk-based measures. The leverage 
measure \2\ uses on-balance sheet assets as the basis for setting 
capital requirements that are intended to limit the degree to which a 
banking organization can leverage its equity capital base. The risk-
based measures (the general risk-based capital rules \3\ and the 
advanced approaches rules) \4\ establish capital requirements intended 
to reflect the risks associated with on-balance sheet exposures as well 
as off-balance sheet exposures, such as guarantees, commitments, and 
derivative transactions. The agencies use generally accepted accounting 
principles (GAAP), as established by FASB, as the initial basis for 
determining whether an exposure is treated as on- or off-balance sheet 
for regulatory capital purposes.
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    \1\ Unless otherwise indicated, the term ``banking 
organization'' includes banks, savings associations, and bank 
holding companies (BHCs).
    \2\ 12 CFR part 3 (OCC); 12 CFR part 208, appendix B and 12 CFR 
part 225 appendix D (Board); 12 CFR part 325.3 (FDIC); 12 CFR 567.8 
(OTS).
    \3\ 12 CFR part 3, appendix A (OCC); 12 CFR parts 208 and 225, 
appendix A (Board); 12 CFR part 325, appendix A (FDIC); and 12 CFR 
part 567, subpart B (OTS). The risk-based capital rules generally do 
not apply to bank holding companies with $500 million or less in 
consolidated assets.
    \4\ 12 CFR part 3, appendix C (OCC); 12 CFR part 208, appendix F 
and 12 CFR part 225, appendix G (Board); 12 CFR part 325, appendix D 
(FDIC); 12 CFR 567, Appendix C (OTS).
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    The GAAP treatment for structured finance transactions using a 
special purpose entity (SPE) generally has been governed by the 
requirements of Statement of Financial Accounting Standards No. 140, 
Accounting for Transfers and Servicing of Financial Assets and 
Extinguishments of Liabilities (FAS 140) and FASB Interpretation No. 
46R, Consolidation of Variable Interest Entities (FIN 46(R)).\5\ Under 
FAS 140 (as currently in effect), transfers of assets to an entity that 
meets the definition of a qualifying special purpose entity (QSPE) are 
usually recognized as sales, which permits the transferor to remove the 
assets from its balance sheet.\6\ In addition, FIN 46(R) specifically 
excludes QSPEs from its scope despite the fact that many QSPEs would 
have otherwise been deemed variable interest entities (VIEs) subject to 
FIN 46(R) and possible consolidation.
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    \5\ Statement of Financial Accounting Standards No. 140 (FASB 
2000) and Interpretation No. 46R (FASB 2003). All references made to 
FASB Statements of Financial Accounting Standards and 
Interpretations have been or will soon be included in the FASB 
Accounting Standards Codification that became effective on July 1, 
2009.
    \6\ The transfers are recognized as sales as long as they meet 
other criteria contained in the 2000 version of FAS 140, as amended. 
See FAS 140, paragraph 9.
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    On June 12, 2009, FASB finalized modifications to FAS 140 and FIN 
46(R) (the 2009 GAAP modifications) through Statement of Financial 
Accounting Standards No. 166, Accounting for Transfers of Financial 
Assets, an Amendment of FASB Statement No. 140 (FAS 166), and Statement 
of Financial Accounting Standards No. 167, Amendments to FASB 
Interpretation No. 46(R) (FAS 167). FAS 166 and FAS 167 are effective 
as of the beginning of a banking organization's first annual financial 
statement reporting period that begins after November 15, 2009, 
including interim periods therein, and for interim and annual periods 
thereafter.\7\
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    \7\ See relevant provisions in FAS 166 paragraphs 5-7 and FAS 
167 paragraphs 7-10.
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    As discussed in further detail below, the 2009 GAAP modifications, 
among other things, remove the concept of a QSPE from GAAP and alter 
the consolidation analysis for VIEs, thereby subjecting many VIEs that 
are not consolidated under current GAAP standards to consolidation 
requirements. These changes will require some banking organizations to 
consolidate the assets, liabilities, and equity of certain VIEs onto 
their balance sheets for financial and regulatory reporting purposes.

II. The 2009 GAAP Modifications

    Under FAS 167, a VIE is an entity whose equity investment at risk 
is insufficient to permit the entity to finance its activities without 
additional subordinated financial support (for

[[Page 47141]]

example, an entity with nominal common equity) and/or whose equity 
investors do not have rights or obligations with respect to the entity 
typical of equity investors. For example, a VIE generally exists when 
the administrators of an entity hold a nominal common equity interest, 
and debt holders hold the rest of the economic interests in the entity 
(which frequently are issued in various degrees of subordination). 
Similarly, an entity is a VIE if its equity holders, as a group, lack 
the right to make decisions about the entity's activities; the 
obligation to absorb the expected losses of the entity, or the right to 
receive the expected residual returns of the entity.\8\ Thus, for 
example, an entity whose debt holders, rather than its common equity 
holders, have all essential voting rights and the rights to receive all 
revenue generated by the entity's assets, generally would be a VIE.
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    \8\ FAS 167, appendix D, paragraphs 5 and 6.
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    Determining whether a specific company is required to consolidate a 
VIE under FAS 167 depends on a qualitative analysis of whether that 
company has a ``controlling financial interest'' in the VIE. The 
analysis focuses on the company's power over and interest in the VIE, 
rather than on quantitative equity ownership thresholds. A company has 
a controlling financial interest in a VIE if it has (1) the power to 
direct matters that most significantly impact the activities of the 
VIE, including, but not limited to, activities that impact the VIE's 
economic performance (for example, servicing activities); and (2) 
either the obligation to absorb losses of the VIE that potentially 
could be significant to the VIE, or the right to receive benefits from 
the VIE that potentially could be significant to the VIE, or both.\9\
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    \9\ See FAS 167, appendix D, paragraphs 14 and 14A-14G.
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    A company's analysis of whether it must consolidate a VIE must 
incorporate the above criteria and take into account the company's 
interest(s) in the VIE and the characteristics of the VIE, including 
the involvement of other VIE interest holders.\10\ FAS 167 also 
requires a company to conduct ongoing assessments using the above 
criteria to determine whether a VIE is subject to consolidation.\11\
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    \10\ See FAS 167, appendix D, paragraphs 14C-14E. If a company 
determines that power is shared among multiple parties so that no 
one party is deemed to have a controlling financial interest, it is 
not required to consolidate the VIE. FAS 167, appendix D, paragraph 
14D. It is expected that some VIEs will not be consolidated by any 
company.
    \11\ See FAS 167 p. ii.
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    FAS 166 amends FAS 140 by removing the QSPE concept from GAAP, 
strengthening the requirements for recognizing the transfer of 
financial assets to a third party, and requiring companies to make 
additional disclosures about any continuing involvement they may have 
in financial assets that they transfer.\12\ As a result, a company that 
transferred financial assets to an SPE that previously met the 
definition of a QSPE must now evaluate whether it must consolidate the 
assets, liabilities, and equity of the SPE pursuant to FAS 167. 
Furthermore, under the additional disclosure requirements in FAS 166, 
companies must detail in their financial statements their continuing 
involvement--through recourse or guarantee arrangements, servicing 
arrangements, or other relationships--in any financial assets that they 
transfer to an SPE (whether or not a company is required to consolidate 
the SPE following the transfer). These disclosure requirements apply as 
long as a transferring company is involved in financial assets that it 
has transferred.\13\
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    \12\ See FAS 166, appendix D, paragraphs 16A-17.
    \13\ See FAS 166, appendix D, paragraph 16D. FAS 166 also 
requires companies to provide periodically additional information 
about gains and losses resulting from transfers of financial assets. 
See id., paragraph 17.
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    The 2009 GAAP modifications do not provide for the grandfathering 
of existing financial structures. Most banking organizations that will 
be required to consolidate and recognize on their balance sheets many 
previously unconsolidated VIEs due to the 2009 GAAP modifications will 
consolidate as of January 1, 2010.\14\ These newly consolidated 
entities will therefore be included in relevant regulatory reports of 
banking organizations, such as the bank Reports of Condition and Income 
(Call Reports), the Thrift Financial Report (TFR), and the bank holding 
company financial statements (FR Y-9C Report). A preliminary analysis 
of the 2009 GAAP modifications, as well as analysis derived from the 
agencies' supervisory information, indicates that the categories of 
off-balance sheet exposures likely to be subject to consolidation on an 
originating or servicing banking organization's balance sheet include:
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    \14\ It is anticipated that most banking organizations affected 
by the 2009 GAAP modifications have annual reporting periods 
starting on January 1 and will implement the new standards on 
January 1, 2010. However, some banking organizations use different 
annual reporting periods and will implement the new standards at the 
beginning of their first fiscal year that starts after November 15, 
2009.
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     Certain asset-backed commercial paper (ABCP) conduits;
     Revolving securitizations structured as master trusts, 
including credit card and home equity line of credit (HELOC) 
securitizations;
     Certain mortgage loan securitizations not guaranteed by 
the U.S. government or a U.S. government-sponsored agency;
     Certain term loan securitizations in which a banking 
organization retains a residual interest and servicing rights, 
including some student loan and automobile loan securitizations; and
     Other SPEs, such as certain tender option bond trusts that 
were designed as QSPEs.

The 2009 GAAP modifications may also require banking organizations to 
recognize on their balance sheets certain loan participations and other 
exposures not related to asset securitization. In addition, banking 
organizations may need to establish loan loss reserves \15\ to cover 
incurred losses on the assets consolidated pursuant to the 2009 GAAP 
modifications. Each banking organization must determine which 
structures and exposures must be consolidated onto its balance sheet, 
and assess other appropriate adjustments to relevant financial reports, 
as a result of the 2009 GAAP modifications.
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    \15\ Under GAAP, an allowance for loan and lease losses (ALLL) 
should be recognized when events have occurred indicating that it is 
probable that an asset has been impaired or that a liability has 
been incurred as of the balance sheet date and that the amount of 
the loss can be reasonably estimated. Under the risk-based capital 
rules, the ALLL is a component of tier 2 capital and, therefore, 
included in the numerator of the total risk-based capital ratio. 
However, the amount of ALLL that may be included in tier 2 capital 
is limited to 1.25 percentage points of gross risk-weighted assets.
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    Question 1: Which types of VIEs will banking organizations have to 
consolidate onto their balance sheets due to the 2009 GAAP 
modifications, which types are not expected to be subject to 
consolidation, and why? Which types are likely to be restructured to 
avoid consolidation?

III. Regulatory Capital and the 2009 GAAP Modifications

    The agencies' capital standards generally use GAAP treatment of an 
exposure as a starting point for assessing regulatory capital 
requirements for that exposure. For example, if certain assets of a 
banking organization are transferred to a VIE through a secured 
financing but remain on the banking organization's balance sheet under 
GAAP, the VIE's assets are risk-weighted like other consolidated 
assets. However, if the assets are securitized through sale to a VIE 
that the banking organization does not consolidate under GAAP, 
generally the banking organization is required to

[[Page 47142]]

hold risk-based capital only against its contractual exposures to the 
VIE.\16\ The contractual exposures may take the form of on-balance 
sheet exposures such as asset-backed securities and residual interests, 
and off-balance sheet exposures such as liquidity facilities. The 2009 
GAAP modifications generally would increase the amount of exposures 
recognized on banking organizations' balance sheets. Accordingly, under 
the agencies' current regulatory capital requirements, the 2009 GAAP 
modifications generally would result in higher regulatory capital 
requirements for those banking organizations that must consolidate 
VIEs.
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    \16\ 12 CFR part 3, appendix A, Sec.  4 (OCC); 12 CFR parts 208 
and 225, appendix A Sec.  III (Board); 12 CFR part 325, appendix A, 
Sec.  II (FDIC); 12 CFR 567.6.
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    Under the agencies' leverage capital requirements, tier 1 capital 
is assessed against a measure of a banking organization's total assets, 
net of the ALLL and certain other exposures.\17\ Therefore, previously 
unconsolidated assets that now must be recognized on a banking 
organization's balance sheet due to the 2009 GAAP modifications will 
increase the denominator of the banking organization's leverage ratio. 
Although the 2009 GAAP modifications will also affect the numerator of 
the risk-based and leverage capital ratios, in many cases both the 
risk-based and leverage capital ratios of affected banking 
organizations will decrease following implementation of the 2009 GAAP 
modifications.
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    \17\ See 12 CFR 3.2(a) (OCC); 12 CFR part 208, appendix B Sec.  
II.b and 12 CFR part 225, appendix D, Sec.  II.b (Board); 12 CFR 
325.2(m) (FDIC); 12 CFR 567.5(b)(4) (OTS).
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    The risk-based capital rules specify the components of regulatory 
capital and recognize variations of risk levels among different 
exposures through different risk-weight assignments. Although for many 
years the agencies have used financial information reported under GAAP 
as the starting point for banking organizations' regulatory reporting 
requirements,\18\ the risk-based capital rules adjust GAAP balance 
sheet inputs where appropriate to capture an exposure's risk or the 
ability of elements of capital to absorb loss.\19\
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    \18\ Although Federal law requires that the accounting 
principles applicable to bank ``reports or statements'' be 
consistent with, or no less stringent than GAAP, it does not require 
the Federal banking agencies to adhere to GAAP when determining 
compliance with regulatory capital requirements. See 12 U.S.C. 
1831n(a)(2) and 12 U.S.C. 1831n(b).
    \19\ A notable example where the risk-based capital rules differ 
from GAAP is in the requirement that banking organizations hold 
capital against the contingent risk of a number of off-balance sheet 
exposures, such as loan commitments and letters of credit, as well 
as against the counterparty credit risk of derivatives. As a further 
example, while GAAP includes goodwill and intangibles in total 
stockholders' equity, certain of these items are deducted from 
stockholders' equity when calculating regulatory capital. See 12 CFR 
part 3, appendix A, Sec.  2(c) (OCC); 12 CFR parts 208 and 225, 
appendix A, Sec. Sec.  II and III.A (Board); 12 CFR part 325, 
appendix A, Sec. Sec.  I. and II.D. (FDIC); 12 CFR 567.5(a)(1)(v) 
and 567.5(a)(2) (OTS).
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    In their consideration of the 2009 GAAP modifications and the 
interaction of the modifications with the regulatory capital 
requirements, the agencies have determined that the qualitative 
analysis required under FAS 167, as well as enhanced requirements for 
recognizing transfers of financial assets under FAS 166, converge in 
many respects with the agencies' assessment of a banking organization's 
risk exposure to a structured finance transaction and other 
transactions affected by the 2009 GAAP modifications.
    In the case of some structures that banking organizations were not 
required to consolidate prior to the 2009 GAAP modifications, the 
recent turmoil in the financial markets has demonstrated the extent to 
which the credit risk exposure of the sponsoring banking organization 
to such structures (and their related assets) has in fact been greater 
than the agencies estimated, and more associated with non-contractual 
considerations than the agencies had expected. For example, recent 
performance data on structures involving revolving assets \20\ show 
that banking organizations have often provided non-contractual 
(implicit) support to prevent senior securities of the structure from 
being downgraded, thereby mitigating reputational risk and the 
associated alienation of investors, and preserving access to cost-
effective funding.
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    \20\ Typical structures of this type include securitizations 
that are backed by credit card or HELOC receivables, single and 
multi-seller ABCP conduits, and structured investment vehicles.
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    In light of this recent experience, the agencies believe that the 
broader accounting consolidation requirements implemented by the 2009 
GAAP modifications will result in a regulatory capital treatment that 
more appropriately reflects the risks to which banking organizations 
are exposed. Additionally, the 2009 GAAP modifications require that a 
banking organization regularly update its consolidation analysis with 
respect to VIEs, and the enhanced requirements for recognition of asset 
transfers and ongoing disclosure requirements for financial assets with 
which the banking organization maintains some relationship. These 
requirements are consistent with the agencies' view that the capital 
treatment of some previously unconsolidated VIEs does not reflect the 
actual risk to which the banking organization may be exposed.
    Question 2: Are there features and characteristics of 
securitization transactions or other transactions with VIEs, other 
SPEs, or other entities that are more or less likely to elicit banking 
organizations' provision of non-contractual (implicit) support under 
stressed or other circumstances due to reputational risk, business 
model, or other reasons? Commenters should describe such features and 
characteristics and the methods of support that may be provided. The 
agencies are particularly interested in comments regarding credit card 
securitizations, structured investment vehicles, money market funds, 
hedge funds, and other entities that are likely beneficiaries of non-
contractual support.
    The banking agencies have carefully considered the probable effect 
on banking organizations' regulatory capital ratios that will result 
from the 2009 GAAP modifications and the possible alignments between 
these effects and the risk-based principles of the risk-based capital 
rules. The agencies have also carefully considered the potential 
financial impact of the 2009 GAAP modifications on banking 
organizations. As part of this consideration, the agencies reviewed 
relevant data from banking organizations' public financial filings and 
regulatory reports as well as information obtained from the supervisory 
process, including the results of the Supervisory Capital Assessment 
Program (SCAP). The SCAP evaluated the capital position of the nineteen 
largest U.S. banking organizations, which are also the banking 
organizations most involved in asset securitization. As part of the 
SCAP, participating banking organizations' capital adequacy was 
assessed using consolidation assumptions consistent with standards 
ultimately included in FAS 166 and FAS 167.\21\
---------------------------------------------------------------------------

    \21\ A description of the design and implementation of the SCAP 
can be found at https://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090424a1.pdf. Additionally, an overview of the results 
of the SCAP, including regulatory capital ratios calculated pro 
forma assuming implementation of the 2009 GAAP modifications, can be 
accessed at https://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf.
---------------------------------------------------------------------------

    Having considered this information, including the SCAP results, the 
agencies do not, at this time, find that a compelling basis exists for 
modifying their regulatory capital requirements to alter the effect of 
the 2009 GAAP modifications on banking organizations' minimum 
regulatory capital

[[Page 47143]]

requirements. Furthermore, as discussed above, the banking agencies 
believe that the capital treatment of many exposures that would be 
consolidated under the new accounting standards aligns with risk-based 
capital principles and results in more appropriate risk-based capital 
charges. The agencies also believe that it is most appropriate for the 
leverage ratio to continue to reflect the total on-balance sheet assets 
of a banking organization, in keeping with its role as a supplement to 
the risk-based capital measure that limits the maximum degree to which 
a banking organization can leverage its equity capital base.\22\
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    \22\ 12 CFR 3.6(b) and (c) (OCC); 12 CFR part 208, appendix B, 
Sec.  I.a. and 12 CFR part 225, appendix D, Sec.  I.a (Board); 12 
CFR part 325, appendix B (FDIC); 12 CFR 567.5 (OTS).
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    Question 3: What effect will the 2009 GAAP modifications have on 
banking organizations' financial positions, lending, and activities? 
How will the modifications impact lending typically financed by 
securitization and lending in general? How may the modifications affect 
the financial markets? What proportion of the impact is related to 
regulatory capital requirements? Commenters should provide specific 
responses and supporting data.
    Question 4: As is generally the case with respect to changes in 
accounting rules, the 2009 GAAP modifications would immediately affect 
banking organizations' capital requirements. The agencies specifically 
request comment on the impact of immediate application of the 2009 GAAP 
modifications on the regulatory capital requirements of banking 
organizations that were not included in the SCAP. In light of the 
potential impact at this point in the economic cycle of the 2009 GAAP 
modifications on regulatory capital requirements, the agencies solicit 
comment on whether there are significant costs and burdens (or 
benefits) associated with immediate application of the 2009 GAAP 
modifications to regulatory capital requirements. If there are 
significant costs and burdens, or other relevant considerations, should 
the agencies consider a phase-in of the capital requirements that would 
result from the 2009 GAAP modifications? Commenters should provide 
specific and detailed rationales and supporting evidence and data to 
support their positions.
    Additionally, if a phase-in of the impact of the GAAP modifications 
is appropriate, what type of phase-in should be considered? For 
example, would a phase-in over the course of a four-quarter period, as 
described below, for transactions entered into on or prior to December 
31, 2009, reduce costs or burdens without reducing benefits?
    Under a four-quarter phase-in approach, the amount of a newly-
consolidated VIE's assets that would be subject to the phase-in would 
be limited to the aggregate value of the assets held by the entity as 
of the last day of the fiscal year prior to its implementation of the 
2009 GAAP modifications. For most banking organizations, the aggregate 
value would be calculated as of December 31, 2009.
    During such a phase-in, banking organizations would be required to 
hold capital (for purposes of calculating both the leverage and risk-
based capital ratios) incrementally against 25 percent of exposures 
subject to consolidation due to the 2009 GAAP modifications for each of 
the first three quarters of 2010, and against 100 percent of the 
exposures thereafter. For example, if, as a result of the 2009 GAAP 
modifications, a banking organization would have to consolidate $10 
billion of assets associated with transactions entered into on or 
before December 31, 2009, it would be required to include $2.5 billion 
of these assets in its regulatory capital ratios the first quarter 
2010, $5 billion the second, $7.5 billion the third, and the full $10 
billion of assets in the fourth quarter and future reporting periods. 
During such a phase-in period, the amount of capital that an 
institution holds against all of its exposures to a single VIE as of 
December 31, 2009, would not be reduced as a result of this phase-in. 
For example, if a banking organization is effectively required to hold 
risk-based capital against all exposures in a VIE due to a provision of 
implicit recourse, that capital treatment would continue throughout 
2010. For another example, if in the first quarter of the phase-in the 
amount of capital required for a banking organization's credit 
enhancements to a securitization on December 31, 2009, exceeds the 
amount of capital required for 25 percent (the first quarter phase-in 
amount) of the newly consolidated underlying assets, the banking 
organization would be required to hold the greater amount of capital.
    Regulatory capital rules establish only a minimum capital 
requirement. In all cases, banking organizations should hold capital 
commensurate with the level and nature of the risks to which they are 
exposed. Supervisors will review a banking organization's 
securitization and other structured finance activities on an individual 
transaction and business-line basis, and may require a banking 
organization to increase its capital if they conclude that its capital 
position is not commensurate with its risk.\23\
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    \23\ 12 CFR part 3.4(b) (OCC); 12 CFR parts 208 and 225, 
appendix A Sec.  I (Board); 12 CFR part 325, appendix A Sec.  IIA 
(FDIC); 12 CFR 567.11 (OTS).
---------------------------------------------------------------------------

IV. Asset-Backed Commercial Paper Programs

    The agencies propose to eliminate existing provisions in the risk-
based capital rules that permit a banking organization, if it is 
required to consolidate under GAAP an ABCP program that it sponsors, to 
exclude the consolidated ABCP program assets from risk-weighted assets 
and instead assess the risk-based capital requirement against any 
contractual exposures of the organization arising from such ABCP 
programs.\24\ The agencies also propose to eliminate the associated 
provision in the general risk-based capital rules (incorporated by 
reference in the advanced approaches) that excludes from tier 1 capital 
the minority interest in a consolidated ABCP program not included in a 
banking organization's risk-weighted assets.\25\
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    \24\ 12 CFR part 3, appendix A, Sec.  3(a)(5) and 12 CFR part 3, 
appendix C Sec.  42(l) (OCC); 12 CFR part 208, appendix A, Sec.  
III.B.6.b and appendix F Sec.  42(l) and 12 CFR part 225, appendix 
A, Sec.  III.B.6.b and appendix G Sec.  42(l) (Board); 12 CFR part 
325, appendix A, Sec.  II.B.6.b and 12 CFR part 325, appendix D, 
Sec.  424(l) (FDIC); 12 CFR 567.6(a)(2)(vi)(E) and 12 CFR part 567, 
appendix C, Sec.  42(l) (OTS).
    \25\ 12 CFR part 3, appendix A, Sec.  2(a)(3)(ii) (OCC); 12 CFR 
parts 208 and 225, appendix A, Sec.  II A.1.c (Board); 12 CFR part 
325, appendix A, Sec.  I.A.1.(d) (FDIC); 12 CFR 567.5(a)(iii)(OTS). 
See 12 CFR part 3, appendix C Sec.  11(a) (OCC); 12 CFR part 208, 
appendix F, Sec.  11(a) and 12 CFR part 225, appendix G, Sec.  11(a) 
(Board); 12 CFR part 325, appendix D, Sec.  11(a) (FDIC); 12 CFR 
part 567, appendix C, Sec.  11(a) (OTS).
---------------------------------------------------------------------------

    The agencies initially implemented these provisions in the general 
risk-based capital rules in 2004 in response to changes in GAAP that 
required consolidation of certain ABCP conduits by sponsors. The 
provisions were driven largely by the agencies' belief at the time that 
banking organizations sponsoring ABCP conduits generally faced limited 
risk exposures to ABCP programs, because these exposures generally were 
confined to the credit enhancements and liquidity facility arrangements 
banking organizations provide to these programs.\26\
---------------------------------------------------------------------------

    \26\ See 69 FR 44908 (July 28, 2004).
---------------------------------------------------------------------------

    Additionally, the agencies believed previously that operational 
controls and structural provisions, as well as over-collateralization 
or other credit enhancements provided by the companies that sell assets 
into ABCP programs, could further mitigate the risk to which sponsoring 
banking organizations were exposed. However, in light of the increased 
incidence of

[[Page 47144]]

banking organizations providing non-contractual support to these 
programs, as well as the general credit risk concerns discussed above, 
the agencies have reconsidered the appropriateness of excluding 
consolidated ABCP program assets from risk-weighted assets and have 
determined that continuing the exclusion is no longer justified. Under 
the proposal, if a banking organization is required to consolidate an 
entity associated with an ABCP program under GAAP, it must hold 
regulatory capital against the assets of the entity. It would not be 
permitted to calculate its risk-based capital requirements with respect 
to the entity based on its contractual exposure to the entity.

V. Reservation of Authority

    The agencies expect that there may be instances when a banking 
organization structures a financial transaction with an SPE to avoid 
consolidation under FAS 166 and FAS 167, and the resulting capital 
treatment is not commensurate with the actual risk relationship of the 
banking organization to the entity. Under this proposal, the banking 
organization's primary Federal supervisor would retain the authority to 
require the banking organization to treat the entity as if it were 
consolidated onto the banking organization's balance sheet for risk-
based capital purposes.
    Question 5: The agencies request comment on all aspects of this 
proposed rule, including the proposal to remove the exclusion of 
consolidated ABCP program assets from risk-weighted assets under the 
risk-based capital rules, the proposed reservation of authority 
provisions, and the regulatory capital treatment that would result from 
the 2009 GAAP modifications absent changes to the agencies' regulatory 
capital requirements.
    Question 6: Does this proposal raise competitive equity concerns 
with respect to accounting and regulatory capital treatments in other 
jurisdictions or with respect to international accounting standards?
    Although the agencies believe that GAAP, as modified, should remain 
the starting point for calculating regulatory capital ratios and that 
the capital requirements resulting from the 2009 GAAP modifications 
generally will result in a more appropriate reflection of credit risk, 
the agencies recognize that the principles underlying the 2009 GAAP 
modifications--power, benefits, and obligation to bear losses--and the 
resulting consolidation treatment, may not in all situations and 
respects correspond to a treatment that would result from a more pure 
risk focus.
    Question 7: Among the structures that likely will be consolidated 
under the 2009 GAAP modifications, for which types, if any, should the 
agencies consider assessing a different risk-based capital requirement 
than the capital treatment that will result from the implementation of 
the modifications? How are commenters' views influenced by proposals 
for reforming the securitization markets that require securitizers to 
retain a percentage of the credit risk on any asset that is 
transferred, sold or conveyed through a securitization? Commenters 
should provide a detailed explanation and supporting empirical analysis 
of why the features and characteristics of these structure types merit 
an alternative treatment, how the risks of the structures should be 
measured, and what an appropriate alternative capital treatment would 
be. Responses should also discuss in detail with supporting evidence 
how such different capital treatment may or may not give rise to 
capital arbitrage opportunities.
    Question 8: Servicers of securitized residential mortgages who 
participate in the Treasury's Making Home Affordable Program (MHAP) 
receive certain incentive payments in connection with loans modified 
under the program. If a structure must be consolidated solely due to 
loan modifications under MHAP, should these assets be included in the 
leverage and risk-based capital requirements? Commenters should specify 
the rationale for an alternative treatment and what an appropriate 
alternative capital requirement would be.
    Question 9: Which features and characteristics of transactions that 
may not be subject to consolidation after the 2009 GAAP modifications 
become effective should be subject to risk-based capital requirements 
as if consolidated in order to more appropriately reflect risk?
    Question 10: Will securitized loans that remain on the balance 
sheet be subjected to the same ALLL provisioning process, including 
comparable loss rates, as similar loans that are not securitized? If 
the answer is no, please explain. If the answer is yes, how would 
banking organizations reflect the benefits of risk sharing if investors 
in securitized, on-balance sheet loans absorb realized credit losses? 
Commenters should provide quantification of such benefits, and any 
other effects of loss sharing, wherever possible. Additionally, are 
there policy alternatives to address any unique challenges the pending 
change in accounting standards present with regard to the ALLL 
provisioning process including, for example, the current constraint on 
the amount of provisions that are includible in tier 2 capital? 
Commenters should provide quantification of the effects of the current 
limits on the includibility of provisions in tier 2 capital and the 
extent to which the 2009 GAAP modifications and the changes in 
regulatory capital requirements proposed in this NPR affect those 
limits.

VI. Regulatory Analysis

Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
generally requires that, in connection with a notice of proposed 
rulemaking, an agency prepare and make available for public comment an 
initial regulatory flexibility analysis that describes the impact of a 
proposed rule on small entities.\27\ Under regulations issued by the 
Small Business Administration,\28\ a small entity includes a commercial 
bank, bank holding company, or savings association with assets of $175 
million or less (a small banking organization). As of June 30, 2009, 
there were approximately 2,533 small bank holding companies, 385 small 
savings associations, 749 small national banks, 432 small State member 
banks, and 3,040 small State nonmember banks. As a general matter, the 
Board's general risk-based capital rules apply only to a bank holding 
company that has consolidated assets of $500 million or more. 
Therefore, the proposed changes to the Board's capital adequacy 
guidelines for bank holding companies will not affect small bank 
holding companies.
---------------------------------------------------------------------------

    \27\ See 5 U.S.C. 603(a).
    \28\ See 13 CFR 121.201.
---------------------------------------------------------------------------

    Other than the proposed modifications to the risk-based capital 
rules that would no longer allow banking organizations to exclude 
consolidated ABCP programs from risk-weighted assets, the proposed rule 
does not impose any additional obligations, restrictions, burdens, or 
reporting, recordkeeping or compliance requirements on banks or savings 
associations, including small banking organizations, nor does it 
duplicate, overlap or conflict with other Federal rules. The agencies 
expect that the proposed modifications to the general risk-based 
capital rules would not materially affect small banking organizations 
because they do not sponsor ABCP programs.

Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995

[[Page 47145]]

(44 U.S.C. 3506), the agencies have reviewed the proposed rule. The 
Board reviewed the proposed rule under the authority delegated to the 
Board by the Office of Management and Budget. The agencies note that 
instructions related to ABCP conduits in schedule RC-R of the 
Consolidated Reports of Condition and Income (OMB Nos. 7100-0036, 1557-
0081, and 3064-0052; FFIEC 031 and 041) and schedule HC-R of the 
Consolidated Financial Statements for Bank Holding Companies (OMB No. 
7100-0128; FR Y-9C) would need to be revised under the proposal. The 
agencies, however, do not believe that there would be any additional 
burden associated with these instructional changes as they would be in 
accordance with GAAP.

OCC/OTS Executive Order 12866

    Executive Order 12866 requires Federal agencies to prepare a 
regulatory impact analysis for agency actions that are found to be 
``significant regulatory actions.'' Significant regulatory actions 
include, among other things, rulemakings that ``have an annual effect 
on the economy of $100 million or more or adversely affect in a 
material way the economy, a sector of the economy, productivity, 
competition, jobs, the environment, public health or safety, or State, 
local, or Tribal governments or communities.'' The OCC and the OTS each 
determined that its portion of the proposed rule is not a significant 
regulatory action under Executive Order 12866.

OCC/OTS Unfunded Mandates Reform Act of 1995 Determination

    The Unfunded Mandates Reform Act of 1995 \29\ (UMRA) requires that 
an agency prepare a budgetary impact statement before promulgating a 
rule that includes a Federal mandate that may result in the expenditure 
by State, local, and Tribal governments, in the aggregate, or by the 
private sector of $100 million or more (adjusted annually for 
inflation) in any one year. If a budgetary impact statement is 
required, section 205 of the UMRA also requires an agency to identify 
and consider a reasonable number of regulatory alternatives before 
promulgating a rule. The OCC and the OTS each have determined that its 
proposed rule will not result in expenditures by State, local, and 
Tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. Accordingly, neither the OCC nor the 
OTS has prepared a budgetary impact statement or specifically addressed 
the regulatory alternatives considered.
---------------------------------------------------------------------------

    \29\ See Public Law 104-4.
---------------------------------------------------------------------------

Solicitation of Comments on Use of Plain Language

    Section 722 of the GLBA required the agencies to use plain language 
in all proposed and final rules published after January 1, 2000. The 
agencies invite comment on how to make this proposed rule easier to 
understand. For example:
     Have the agencies organized the material to suit your 
needs? If not, how could they present the rule more clearly?
     Are the requirements in the rule clearly stated? If not, 
how could the rule be more clearly stated?
     Do the regulations contain technical language or jargon 
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes would achieve that?
     Is this section format adequate? If not, which of the 
sections should be changed and how?
     What other changes can the agencies incorporate to make 
the regulation easier to understand?

List of Subjects

12 CFR Part 3

    Administrative practice and procedure, Banks, Banking, Capital, 
National banks, Reporting and recordkeeping requirements, Risk.

12 CFR Part 208

    Confidential business information, Crime, Currency, Federal Reserve 
System, Mortgages, Reporting and recordkeeping requirements, Risk.

12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

12 CFR Part 325

    Administrative practice and procedure, Banks, banking, Capital 
adequacy, Reporting and recordkeeping requirements, Savings 
associations, State nonmember banks.

12 CFR Part 567

    Capital, Reporting and recordkeeping requirements, Risk, Savings 
associations.

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons stated in the common preamble, the Office of the 
Comptroller of the Currency proposes to amend Part 3 of chapter I of 
Title 12, Code of Federal Regulations as follows:

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

    1. The authority citation for part 3 continues to read as follows:

    Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n 
note, 1835, 3907, and 3909.

    2. Section 3.4 is amended by adding paragraph (c) to read as 
follows:


Sec.  3.4  Reservation of authority.

* * * * *
    (c) The OCC may find that that the capital treatment for an 
exposure not subject to consolidation on the bank's balance sheet does 
not appropriately reflect the risks imposed on the bank. Accordingly, 
the OCC may require the bank to treat the exposure as if it were 
consolidated onto the bank's balance sheet for the purpose of 
determining compliance with the bank's minimum risk-based capital 
requirements set forth in Appendix A or Appendix C to this Part. The 
OCC will look to the substance of and risk associated with the 
transaction as well as other relevant factors the OCC deems appropriate 
in determining whether to require such treatment and in determining the 
bank's compliance with minimum risk-based capital requirements.
    3. In appendix A to Part 3:
    A. In section 2, remove and reserve paragraph (a)(3)(ii),
    B. In section 3, remove and reserve paragraph (a)(5),
    C. Revise paragraph (a)(6).
    The revision reads as follows:

Appendix A to Part 3--Risk Based Capital Guidelines

* * * * *
    Section 3. * * *
* * * * *
    (a) * * *
    (6) Other variable interest entities subject to consolidation. 
If a bank is required to consolidate the assets of a variable 
interest entity under generally accepted accounting principles, the 
bank must assess a risk-based capital charge based on the 
appropriate risk weight of the consolidated assets in accordance 
with sections 3(a) and 4 of this appendix A. Any direct credit 
substitutes and recourse obligations (including residual

[[Page 47146]]

interests), and loans that a bank may provide to such a variable 
interest entity are not subject to any capital charge under section 
4 of this appendix A.

    4. In appendix C to Part 3:
    A. In section 1, redesignate paragraph (c)(3) as paragraph (c)(4),
    B. Add a new paragraph (c)(3),
    C. Remove section 42(l) and redesignate section 42(m) as section 
42(l)
    The additions and revisions read as follows:

Appendix C to Part 3--Capital Adequacy Guidelines for Banks: Internal-
Ratings-Based and Advanced Measurement Approaches

* * * * *
    Section 1. * * *
    (c) * * *
    (3) Regulatory capital treatment of unconsolidated entities. If 
the OCC determines that the capital treatment for a banking 
organization's exposure or other relationship to an entity not 
consolidated on the bank's balance sheet is not commensurate with 
the actual risk relationship of the banking organization to the 
entity, for risk-based capital purposes, it may require the banking 
organization to treat the entity as if it were consolidated onto the 
bank's balance sheet and require the bank to hold capital against 
the entity's exposures. The OCC will look to the substance of and 
risk associated with the transaction as well as other relevant 
factors the OCC deems appropriate in determining whether to require 
such treatment and in determining the bank's compliance with minimum 
risk-based capital requirements. In making a determination under 
this paragraph, the OCC will apply notice and response procedures in 
the same manner and to the same extent as the notice and response 
procedures in 12 CFR 3.12.
* * * * *

Board of Governors of the Federal Reserve System

12 CFR Chapter II

Authority and Issuance

    For the reasons stated in the common preamble, the Board of 
Governors of Federal Reserve System amends parts 208 and 225 of Chapter 
II of title 12 of the Code of Federal Regulations as follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    5. The authority for part 208 continues to read as follows:

    Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1833(j), 
1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x 1835a, 1882, 
2901-2907, 3105, 3310, 3331-3351, and 3905-3909; 15 U.S.C. 78b, 
78I(b), 78l(i),780-4(c)(5), 78q, 78q-1, and 78w, 1681s, 1681w, 6801, 
and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 and 
4128.

    6. In appendix A to part 208:
    A. Amend section I by adding a new paragraph immediately prior to 
the last undesignated paragraph,
    B. Amend paragraph (c) of section II.A.1 by removing the last 
sentence,
    C. Remove paragraph (b) of section III.B.6 and redesignate 
paragraph (c) of section III.B.6 as paragraph (b).
    The addition reads as follows:

Appendix A to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Risk-Based Measure

    I. * * *
    If the Federal Reserve determines that the capital treatment for 
a bank's exposure or other relationship to an entity not 
consolidated on the bank's balance sheet is not commensurate with 
the actual risk relationship of the bank to the entity, for risk-
based capital purposes, it may require the bank to treat the entity 
as if it were consolidated onto the bank's balance sheet and require 
the bank to hold capital against the entity's exposures.
* * * * *
    7. In appendix F to part 208:
    A. Redesignate paragraph (c)(3) as (c)(4) and add a new paragraph 
(c)(3);
    B. Remove section 42(l) and redesignate section 42(m) as section 
42(l).
    The addition reads as follows:

Appendix F to Part 208--Capital Adequacy Guidelines for Banks: 
Internal-Ratings-Based and Advanced Measurement Approaches

* * * * *
    Section 1. * * *
    (c) * * *
    (3) Regulatory capital treatment of unconsolidated entities. If 
the Federal Reserve determines that the capital treatment for a 
bank's exposure or other relationship to an entity not consolidated 
on the bank's balance sheet is not commensurate with the actual risk 
relationship of the bank to the entity, for risk-based capital 
purposes, it may require the bank to treat the entity as if it were 
consolidated onto the bank's balance sheet and require the bank to 
hold capital against the entity's exposures.
* * * * *

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

    8. The authority for part 225 continues to read as follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and 
3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.

    9. In appendix A to part 225,
    A. Amend section I by adding the following paragraph immediately 
prior to the last undesignated paragraph,
    B. Amend paragraph (iii) of section II.A.1.c by removing the last 
sentence,
    C. Remove paragraph (b) of section III.B.6 and redesignate 
paragraph (c) of section III.B.6 as paragraph (b).

Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding 
Companies: Risk-Based Measure

    I. * * *
    If the Federal Reserve determines that the capital treatment for 
a banking organization's exposure or other relationship to an entity 
not consolidated on the banking organization's balance sheet is not 
commensurate with the actual risk relationship of the banking 
organization to the entity, for risk-based capital purposes, it may 
require the